Why is the stock market amoral?

SEC proxy voting graphic

by Carl Gershenson

If economic sociologists can agree on anything, it’s that economic life is shaped by more than the pursuit of profits. The influence of culture and values is perhaps most apparent in markets that impinge on the sanctity of the human body: sperm and eggs, organs and plasma, even life insurance. By comparison, capital markets seem much closer to the textbook ideal of markets, where actors care little about the securities they are buying other than, “Will it make me a profit?”

This view of capital markets is clear in the popular opposition between Main Street and Wall Street. If Main Street is used to invoke businesses embedded in local communities, Wall Street invokes businesses that are part of no community, beholden to no one, and willing to do anything for a buck. But why is this view so widespread that we almost take it for granted? Why should capital markets be predisposed toward the unadulterated pursuit of profit? After all, 65% of Americans owned stock before the financial crisis hit. Why would this diverse group of Americans suddenly shed their multidimensional wants and values–to suddenly embody homo economicus–whenever they put on their shareholder hat?

I argue that profit-orientation is so common in the stock market because the state wants it that way. The state values capital markets because they encourage economic growth. According to economic theory, capital markets do this most efficiently when shareholders are able to pursue their own financial interests. In order to do so effectively, shareholders need strong shareholder rights. Without shareholder rights, management would be free to prioritize its own financial interests. However, these rights could also allow shareholders to pursue goals other than their own financial interest—political goals, social goals, and so forth.

I examine how the state responds to shareholders pursuing non-financial goals in an article published in Politics & Society. In a world where corporations affect so many aspects of our lives—and where labor and the state are unable or unwilling to act as countervailing powers—I find that shareholders have tried to use power over corporate management to pursue a variety of social and political goals. In response, the state protects management from shareholders by restricting their ability to make policy-oriented claims. Instead, the state privileges those claims focused on narrowly economic issues. The result is that real world markets, like those in textbooks, are dominated by the pursuit of profit.

The SEC privileges economic motives in corporate democracy

My analysis of the Securities and Exchange Commission’s (SEC) shows that the SEC limits the social influence of shareholders through a marked privileging of profit-oriented claims in American corporate democracy. This is most evident in the SEC’s administration of proxy law, which determines whether shareholders can place items on a corporation’s annual “proxy statement.” The proxy statement is sent out to all shareholders, who may vote on the proposals contained therein. Thus proxy law determine what can and cannot be discussed in American corporate democracy.

Not long after the SEC’s founding in 1934, politicians urged the SEC to constrain the power proxy law gave to shareholders. As one congressman worried in 1942:

So one man, if he owned one share in A.T.&T. and another share in R.C.A. . . . he could have a hundred-word propaganda statement prepared and he could put it in every one of these proxy statements . . . Suppose a man were a Communist and he wanted to send to all of the stockholders of all of these firms, a philosophic statement of 100 words in length, or a propaganda statement. He could by the mere device of buying one share of stock have available to him the mailing list of all the stockholders in the Radio Corporation of America.

To prevent this, the SEC defined “proper subjects” for corporate democracy. Proxy law was intended “to place stockholders in a position to bring before their fellow stockholders matters of concern to them as stockholders in such corporation.” Presumably, philosophic statements were not relevant to shareholders qua shareholders, and so such statements were not a “proper subject” for corporate democracy.

But the SEC was forced to refine its language after a Civil Rights activist submitted a proposal for inclusion on the Greyhound Corporation’s proxy statement in 1951. This proposal recommended that “management consider the advisability of abolishing the segregated seating system in the South.” The SEC allowed Greyhound to ignore this proposal, even though it was directly relevant to Greyhound’s main bussing business. To justify this, the SEC stated that a corporation could exclude a proposal “submitted by the security holder primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.” The SEC had committed itself to assessing precisely how profit-oriented the motives of shareholders were.

The ambiguous line between ordinary and substantial business decisions

Social movements were able to adapt to the SEC’s new rule rather easily by couching their claims in the language of profits. During the Vietnam War, the Medical Committee on Human Rights (MCHR) tried using shareholder proposals to stop Dow Chemical from selling napalm to the U.S. Army. MCHR claimed it submitted this proposal because napalm sales were hurting Dow economically. This claim had surface plausibility inasmuch as protests had disrupted Dow’s recruitment efforts on college campuses. Though no one actually believed that MCHR was losing sleep over Dow’s economic health, its language was sufficiently compliant with the Greyhound ruling that the SEC looked for a different reason to reject MCHR’s proposal. Instead, the SEC stated that shareholders have no power over to whom a corporation sells products. This was an “ordinary business decision” that should be treated as legally distinct from the kinds of economic strategies that shareholders could vote on.

If it was hard enough writing a bright line rule that could accurately distinguish between economic and non-economic motives, it was even harder to write a bright line rule that could determine just how “ordinary” a business decision was. For example, was a shareholder proposal regarding the construction of a nuclear power plant an “ordinary business decision” because it “relates to the mundane matters of the fuel mix and types of electrical generating methods,” or was it substantial because it posed the risk of nuclear meltdown to surrounding communities? Is the power to hire and fire low level employees the very essence of an “ordinary business decision,” or is it a substantial policy decision when management prefers to hire heterosexual staff? Is the decision where to locate company property “ordinary,” or is it “substantial” when a corporation with longstanding ties to a community decides to relocate production overseas?

Because the ordinary business rule is so ambiguous, it became a favorite tool of activists. But this ambiguity irked the SEC, which had to commit considerable resources to deciding on the excludability of these shareholder proposals each proxy season and then defending these decisions in court. This ambiguity also irked management, which longed for the predictability of a hard and fast rule.

And yet every effort to establish a “bright-line rule” that could distinguish between “ordinary business decisions” and decisions with “substantial policy implications” failed for the simple reason that no such bright line exists. Since 1998, the Commission has accepted the necessity of a case-by-case approach to proxy access. In sociological terms, the SEC has accepted that it cannot enforce a rigid market/society boundary. The exact contours of this boundary are renegotiated each proxy season by corporate managers, activist investors, members of the courts, and the SEC.

Protecting markets from society

Why does it seem so natural to us that capital markets are dominated by the profit motive, even though every market participant is a multidimensional being with cultural and ethical commitments? The answer, in part, is that the SEC limits the influence of these cultural and ethical commitments in corporate democracy.

Carl Gershenson is a PhD student at Harvard Sociology whose work focuses on the political origins of the American business corporation.